The Mental Accounting of Price Shocks: The Effect of Unexpected Price Changes on Cross-Category Purchase Patterns

A rarely challenged tenet of economic theory is that as long as consumers do not face liquidity constraints, goods satisfying different fundamental needs not should exhibit significant cross-price elasticities. Mental accounting, however, provides a theoretical mechanism by which this assumption may be violated when the posted prices of goods unexpectedly depart from historical or expected levels. Specifically, expected price shocks may alter the illusory liquidity of consumers, such that unanticipated price increases suppress consumers' tendencies to purchase discretionary goods, while unanticipated price decreases enhance it. This hypothesis is tested using data from a computerized grocery-shopping simulation in which subjects are faced with the problem of minimizing the cost of keeping a home stocked with twelve different grocery items over a multi-period horizon. After an acclimation period where subjects are allowed to develop expectations for the usual prices of these goods, they are exposed to two extreme price-shock events: one where a required item is priced dramatically above its regular retail price, and another dramatically below. The data support the core spillover hypothesis, with high-price shocks suppressing average out-of-category buying and low-price shocks inflating it. The data also show, however, that the mechanism that induces these effects differs between positive and negative shocks. The primary driver of the suppression of average sales given unexpected price increases is dramatically increased small-deal sensitivity; subjects are loathe to buy goods sold at regular retail prices, but are more apt to buy goods offered for sale at small discounts. On the other hand, unexpected price decreases appear to induce a simpler illusory wealth effect, with buying increased but without any change in small-deal sensitivity. An additional surprising finding is that the spillover effect proves robust to several variables that are hypothesized to limit its boundaries. Specifically, the strength of the spillover effect was not modified by variation in whether or not consumers had a standing inventory of a good at home (a surrogate for whether its purchase is more likely to be seen as discretionary), the base price to which the price shock is applied, and previous exposures to price shocks. A discussion of the implications of the work for research in mental accounting and pricing is provided. 2 The assumption that goods satisfying different consumer needs compete for different economic resources is central to much of modern economic demand analysis. In most cases its empirical validity is uncontested ; while increases in the price …